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When it comes to bank owned life insurance pre-purchase analysis, a variety of US Government agencies offer some advice, and some regulations, that make for a strong starting point. The FDIC makes the general, blanket recommendation that any bank interested in purchasing and holding BOLI policies, a detailed, high-quality, well thought out risk management plan should be put into place prior to any purchase. The Office of the Comptroller of Currency details the reasons for which BOLI policies may be purchased, pursuant to 12 USC 24 – in connection to employee benefit and compensation plans, for cover of post-retirement and executive benefit packages, in connection with key person policies, and when related to insurance on borrowers and loan security.

The regulations on BOLI policies tend to change fairly often, so it is recommended to consult the FDIC,OCC, Federal Reserve Board and IRS websites prior to making a purchase plan. The FMS websitealso offers worthwhile reading on the subject of BOLI. In addition to learning the basic reasons for and regulations of purchasing BOLI policies, it is important to do some common sense due diligence and understand the unique risks and rewards of BOLI during pre-purchase analysis.

Best Practices for BOLI Early Pre-Purchase Analysis

  • Prior to deciding on a BOLI purchase, one must consider the situations in which BOLI is notallowed to be purchased, according to the Federal Reserve. BOLI may not be purchased for speculation, to make stock repurchases upon a shareholder’s death, or to provide insider benefits.
  • The first step in a BOLI pre-purchase analysis is to identify the need for insurance, the type of insurance which suits that need, and the economic benefits of that insurance. As the potential size of the BOLI purchase increases, so too must the complexity and depth of the pre-purchase analysis.
  • Once the reason for insurance and ideal type of insurance are determined, the next step is to identify how much insurance will need to be purchased to meet the goals of the bank.
  • With size, type and need identified, one should now be able to compile a list of companies which offer the desired product. One can choose to opt for either a traditional whole life policy which offers only the death benefit, or a universal policy which builds cash value along with the death benefit.

Three Key Concerns in Identifying the Right Provider

  • The first step to identifying the right provider with which to do business is a basic analysis of their business practices and credit rating. Check ratings from agencies like Best, S&P and Fitch to ensure that the provider has a sound credit rating. This is key, as credit relates directly to the ability to pay claims. In addition, one should check whether the provider is mutual or stockholder owned, with mutual companies being preferable. Finally, a general examination of business practices should be performed to ensure that a company operates in an efficient, trustworthy manner.
  • The next key concern is the policy itself. Examine charts relating to premium payments, cash value, and death benefit payouts, making sure to check beyond the first five years. Check the numbers out to year 100, and request that the provider give you a current cash value of the policy, had you purchased it years prior.
  • The last key concern is to make sure that one’s investment is protected. Investigate what safeguards the provider has if they run into financial trouble, or pull out of the BOLI market entirely.

With comprehensive due diligence, BOLI can be a beneficial vehicle for the protection of expensive investments, especially in employee and executive benefits.

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